In an era of perpetual anxiety and algorithmically-ordained solutions, Dr Duvvuri Subbarao, economist and former governor of Reserve Bank of India stands apart for his firm grasp of subject with no illusion of fairness without recourse to facts and debate.
Days before the Union budget, we sought his views on the options before finance minister Nirmala Sitharaman. What could she possibly do to help reignite the inflow of foreign capital, raise domestic investment rate by at least two per cent from 33 per cent to 35 per cent and in an era of ever-reducing fiscal space for productive expenditures and worthy schemes?
Need for fiscal responsibility in direct benefit transfers
Each Union budget, Dr Subbarao says, is a standalone piece with a sprinkling of announcements and initiatives that do not necessarily add up to a long-term programme.
Given that the government is committed to its end goal of a Viksit Bharat by 2047 placing India on the high table to rich nations, the budget would have served its purpose well if it were to share the milestones in this journey and what can be done to stay the course.
A viable option would be to enforce responsibility in direct benefit transfer by the Centre and the states. The finance minister, Dr Subbarao opines, could announce an intent to float a discussion paper on fiscal responsibility in direct benefit transfer and call for a meeting of the finance ministers across Indian states. This should ideally be followed by a meeting with the chief ministers and Niti Aayog to accept restraint on transfer payments. It will aid long-term growth with focus on productive expenditures through enforcement of responsibility arrived at in a consultative mode.
Restoring foreign investor confidence amid capital outflows
The other big challenge is addressing the concerns of global investors? What could be holding back foreign institutional investors. After all, experts have been raising this as a major concern for India having seen the picture turn in a matter of just a year from net capital inflows to net capital outflows and a rupee sliding against the dollar for various reasons.
To Dr Subbarao, they are a result of a combination of pull and push factors. There are push factors like high valuations in the market operating at high PE levels leaving little scope to make big returns. Then, there are the pull factors like hike in interest rates made earlier by rich nations (albeit it is not the case in the US over the last three months). These have all also been aided by the allure of artificial intelligence.
While the long-term capital gains tax on foreign institutional investors for periods of over a year is not very high and is in the realms of 12.5 per cent (also the same for resident Indians), Dr Subbarao feels, one way to attract foreign investors and with it the net inflow of capital would be by adding a dose of clarity and address the concerns over cumbersome process and unpredictability with differing interpretations of various provisions
To address some of these, providing a stable and clear tax regime with some 50-odd FAQs listed out by the ministry of finance could go a long way in helping clear this cloud cover.
Crucial perhaps at a time when despite high growth forecast by various domestic and international agencies going up to 7.4 per cent and an environment of low inflation, the country is still having to grapple with the challenge of capital outflows and the sliding rupee against the dollar. In this context providing policy stability, certainty and clarity over a longer time period will help, says Dr Subbarao.
Others feel the finance minister could consider providing relief in capital gains taxation for investors if the investments are coming through the gift city route as it could achieve the town objectives of promoting gift city as a global financial centre while adding an added incentive to investors but Subbarao is not sure on this or on the approach to tinkering with the capital gains tax and the Securities Transaction Tax (STT) – which is a tax levied by the government on the purchase or sale of securities. Thankfully, it is not a long wait and hopefully there will be greater clarity in the coming week.